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Edited version of your private ruling

Authorisation Number: 1012617251166

Ruling

Subject: Division 7A

Question 1

Will section 109C of the Income Tax Assessment Act 1936 (ITAA 1936) apply to deem there to be a dividend paid by either the Private Company or the Private Finance Company (by virtue of the interposed entity rules contained in sections 109T and 109V of the ITAA 1936) to the Taxpayer under the Ground Lease arrangement?

Answer

No

Question 2

Will section 109D of the ITAA 1936 apply to deem there to be a dividend paid by either the Private Company or the Private Finance Company (by virtue of the interposed entity rules contained in sections 109T and 109W of the ITAA 1936) to the Taxpayer under the Ground Lease arrangement?

Answer

No

This ruling applies for the following periods:

Years ended 30 June 2014 to 30 June 2029

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The Taxpayer owns vacant land (the Land).

It is proposed that the Taxpayer will grant a 15 year lease over the Land to the associated Private Company (the Lease). The Lease will allow the Private Company to build, construct, manage and lease a Commercial Building.

The key terms of the Ground Lease arrangement can be summarised as follows:

The Private Company will require finance to construct the Commercial Building. The finance may be sourced internally from the associated Private Finance Company or externally.

Any loans provided by the Private Finance Company to the Private Company are to be repaid with interest charged at commercial rates.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 109C

Income Tax Assessment Act 1936 Section 109D

Income Tax Assessment Act 1936 Section 109J

Income Tax Assessment Act 1936 Subsection 109L(1)

Income Tax Assessment Act 1936 Section 109T

Income Tax Assessment Act 1936 Section 109V

Income Tax Assessment Act 1936 Section 109W

Income Tax Assessment Act 1936 Section 109Y

Reasons for decision

Question 1

Summary

Section 109C of the ITAA 1936 will not apply to deem there to be a dividend paid by either the Private Company or the Private Finance Company (by virtue of the interposed entity rules contained in sections 109T and 109V of the ITAA 1936) to the Taxpayer under the Ground Lease arrangement.

Detailed reasoning

A private company is relevantly taken to pay a dividend to an entity at the end of the private company's year of income under subsection 109C(1) of the ITAA 1936 if:

A payment to an entity is relevantly defined under subsection 109C(3) of the ITAA 1936 to mean a payment to the extent that it is to the entity or for the benefit of the entity, and a transfer of property to the entity.

Lease payments from the Private Company to the Taxpayer under the Ground Lease

Where the Private Company obtains external finance, the lease payments to the Taxpayer under the Ground Lease will be deemed by section 109C of the ITAA 1936 to be dividends paid from the Private Company to the Taxpayer.

For the income years in which the Private Company does not have a distributable surplus, section 109Y of the ITAA 1936 will limit the dividends taken to be paid to the Taxpayer under subsection 109C(2) to nil.

For the income years in which the Private Company does have a distributable surplus, and depending on whether that distributable surplus is sufficient to cover the lease payments paid to the Taxpayer, the dividends will be taken under subsection 109C(2) of the ITAA 1936 to either equal the amount of the lease payments paid to the Taxpayer or the distributable surplus, unless an exception applies.

There are two exceptions that would apply:

Therefore, the Private Company will not be taken to have paid dividends to the Taxpayer under section 109C of the ITAA 1936.

Where the Private Company obtains finance from the Private Finance Company, the interposed entity provisions of sections 109T and 109V of the ITAA 1936 will need to be considered.

It can be concluded that the Private Finance Company will not be taken to have paid dividends to the Taxpayer under section 109C of the ITAA 1936 (by virtue of the interposed entity rules contained in sections 109T and 109V of the ITAA 1936), because of the following:

Payments made by the Private Company for the construction of the Commercial Building

The payments made by the Private Company for the construction of the Commercial Building will not be to the Taxpayer. Furthermore, as the ownership of the Commercial Building will rest with the Private Company, these payments will be for the benefit of the Private Company and not the Taxpayer.

Therefore, where the Private Company obtains external finance, the Private Company will not be taken to have paid dividends to the Taxpayer under section 109C of the ITAA 1936.

For completeness, where the Private Company obtains finance from the Private Finance Company, the interposed entity provisions of sections 109T and 109V of the ITAA 1936 do not apply as no payments will be made to the Taxpayer as the target entity.

Transfer of the Shopping Centre Complex from the Private Company to the Taxpayer

In the event that the Taxpayer exercises its option under the Ground Lease to purchase the Commercial Building from the Private Company, that transfer will be deemed by section 109C of the ITAA 1936 to be a dividend.

Assuming that the Private Company has a sufficient distributable surplus under section 109Y of the ITAA 1936 at the end of the Ground Lease, the amount of that dividend is taken to equal the amount paid as per subsection 109C(2) of the ITAA 1936. However, under subsection 109C(4) of the ITAA 1936, the amount of a payment consisting of a transfer of property is the amount that would have been paid for the transfer by parties dealing at arm's length less any consideration given by the transferee for the transfer.

As the Taxpayer will be required to purchase the Commercial Building from the Private Company at an agreed market value price, subsection 109C(4) will apply to reduce the amount of the deemed dividend under subsection 109C(2) of the ITAA 1936 to nil.

Therefore, where the Private Company obtains external finance, the Private Company will not be taken to have paid a dividend to the Taxpayer under section 109C of the ITAA 1936.

The above conclusion will not be altered if the Private Company obtains internal finance, as it can be concluded that the Private Finance Company will not be taken to have paid a dividend to the Taxpayer under section 109C of the ITAA 1936 (by virtue of the interposed entity rules contained in sections 109T and 109V of the ITAA 1936), because of the following:

Question 2

Summary

Section 109D of the ITAA 1936 will not apply to deem there to be a dividend paid by either the Private Company or the Private Finance Company (by virtue of the interposed entity rules contained in sections 109T and 109W of the ITAA 1936) to the Taxpayer under the Ground Lease arrangement.

Detailed reasoning

A private company is relevantly taken to pay a dividend to an entity at the end of one of the private company's years of income under subsection 109D(1) of the ITAA 1936 if:

For the purposes of Division 7A, the ordinary meaning of loan is expanded under subsection 109D(3) of the ITAA 1936 to include:

Lease payments from the Private Company to the Taxpayer under the Ground Lease

As the lease payments from the Private Company to the Taxpayer under the Ground Lease will be payments for the purposes of section 109C of the ITAA 1936, they will not be considered loans made to the Taxpayer under section 109D of the ITAA 1936.

For completeness, in the event that the Private Company obtains finance from the Private Finance Company, the interposed entity provisions of sections 109T and 109W of the ITAA 1936 will not apply as no loans will be made to the Taxpayer as the target entity.

Payments made by the Private Company for the construction of the Commercial Building

As the payments made by the Private Company for the construction of the Commercial Building will not be to the Taxpayer, and the ownership of the Commercial Building will rest with the Private Company, they will not be loans made to the Taxpayer under section 109D of the ITAA 1936.

For completeness, in the event that the Private Company obtains finance from the Private Finance Company, the interposed entity provisions of sections 109T and 109W of the ITAA 1936 will not apply as no loans will be made to the Taxpayer as the target entity.

Transfer of the Commercial Building from the Private Company to the Taxpayer

As the transfer of the Commercial Building from the Private Company to the Taxpayer will be a payment for the purposes of section 109C of the ITAA 1936, it will not be considered to be a loan made to the Taxpayer under section 109D of the ITAA 1936.

For completeness, in the event that the Private Company obtains finance from the Private Finance Company, the interposed entity provisions of sections 109T and 109W of the ITAA 1936 will not apply as no loan will be made to the Taxpayer as the target entity.


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